8.4% economic growth in 2005

Vietnam’s real GDP grew by 8.1% in the period January to September, 2005. The growth rate in Q2 was 8.9%, exceeding Q1’s 7.6%, and is expected to continue to grow, resulting in a forecast of 8.4% real GDP growth for 2005, exceeding the previous year’s 7.7%.

Considering GDP growth for January to September, 2005, from the supply side, the manufacturing and service industries performed well, growing by 10.7% and 8.4%, respectively, compared to the same period in the previous year. Reflecting rising prices for main export items such as rice and coffee, etc., on the international markets, agriculture and fisheries also posted solid growth at 4.1%. Private sector businesses supported the high growth in the manufacturing industry.

Manufacturing industry statistics for January to September show that the fastest growing sector was the private sector (up 24.8%, compared to the same period in the previous year), followed at some distance by the foreign sector (up 17.2%, similarly) and the state controlled sector (up 9.6%, similarly). As a result, the state controlled sector now accounts for only 35.5% of industrial production, and the foreign sector 36.1%.

As regards trade in January to September, exports were up 21.1%, compared to the same period in the previous year, at $23.5 billion, and imports up 19.2%, similarly, at $27.4 billion. Exports of natural resources such as crude oil and coal, secondary products such as rice and coffee, and also electronic parts and components have been healthy, with over 30% growth in each case, compared to the same period in the previous year. Electronic parts and components have been supported by direct investment from Japan and are expected to become a major export item. On the other hand, exports of marine products and footwear and textiles have suffered from anti-dumping legislation and tougher competition from Chinese products, and could only manage 4.4% and 13.1% growth, respectively, in the same period.

In terms of direct foreign investment (approved basis) in January to September, there were 570 applications, worth $2.64 billion, a 63.2% increase in monetary terms, compared to the same period in the previous year. Given that there are several projects with a total value of around $1.5 billion waiting approval, such as a Taiwanese stainless steel production project (investment worth: $700 million), a Korean urban development project ($300 million), a U.S. hotel construction project ($300 million) and a Hong Kong optical fiber project ($180 million), the government is expecting a gradual recovery in foreign direct investment.

Japanese investment is in fifth place at the moment, but there is growing interest in Vietnam as an investment destination, due to the growing risk of doing business with China, following the revaluation of the renminbi, electrical power shortages, rising wages and anti-Japanese demonstrations and so on. Vietnam’s cheap labor force and political stability are being reassessed as several large electronics parts and components manufacturers decide to invest in the country.

The consumer price increase rate for January to September rose by 6.8%, continuing to rise at a fast pace. This was because of the increase in fuel and fertilizer costs, pushed up by the high price of crude oil, and the government forecasts that the increase rate for the whole year will top 8%. However, interest rates rose by only a small margin and the impact upon consumption and investment is expected to be limited. Turnover in the finance and services sector for January to September was up 19.8% compared to the same period in the previous year, with automobile sales up 11% similarly, at 25,000, and motorbike production up 14.7%, similarly, at 1.32 million.

8.2% economic growth forecast for 2006

Economic growth for 2006 is expected to be slightly lower than that of the previous year at 8.2%. Domestic demand will be the main growth driver. Domestic private sector companies and foreign direct investment are expected to continue strongly. Rural areas are competing to attract not only foreign direct investment but also private sector investment and there are likely to be further improvements in the business environment. Whereas investments by state controlled enterprises in large businesses under the direct control of central government are likely to continue strongly, investments in small and medium sized enterprises under the control of local government will probably continue to lag behind, suffering the effects of increased competition, stronger restrictions on new corporate investment, and the advance of privatization.

If fuel prices do not rise much further, consumption is expected to continue to grow strongly. In August, 2005, the government decided to raise the price of gasoline 1,200 dong up to 10,000 dong per liter. This was the third price hike since the start of 2005, marking a 47.1% increase within one year. However, fuel prices have reflected the movement of prices on the international market, with small increments, and given the slow pace of motorization and the gradual pace of price increases, the impact on consumption is thought likely to be limited. In fact, there is more concern over the possible impact of the stagnating real estate market on consumption. Amendments to the Land Law will restrict speculative land acquisitions and there are growing concerns that this will cause real estate prices to plummet.

In terms of foreign demand, both exports and imports are forecast to grow at roughly the same pace and are, therefore, not likely to contribute substantially to economic growth. The Minister for Trade and Industry has set an export target of 15.0% growth compared to the previous year, at $36.5 billion.

Vietnam’s accession to the WTO (World Trade Organization) is expected to be realized in 2006, leading to forecasts of an improvement in the export environment. The achievement of the export target will depend on how much growth there is in the exports of such items as textiles and footwear, marine produce, electronic parts and components, and wooden products. However, of these, textiles and footwear and electronic parts and components depend almost entirely on imports of raw materials, so an increase in exports will also entail an increase in imports. Also, as there are forecasts of anti-dumping legislation in the European and U.S. markets, tougher competition from Chinese products and a reduction in crude oil production, there is little room for optimism with regard to expanded foreign demand.

Electrical power shortages are likely to be a factor restricting economic growth. In particular, the power shortage is expected to worsen between March and June, when the water level at the Hoa Binh hydroelectric power plant in the North falls. During the same period in 2005, Hanoi experienced intermittent power cuts. According to government estimates, even if the current construction of ower stations continues as planned, power shortages will continue until 2010.

In addition, the widening income gap is becoming more and more serious. According to a household survey carried out by the government, while the ratios of poor people as part of the population of the Red River Delta, including Hanoi, and the southeast, including Ho Chi Minh City have fallen, many households in the northeast region bordering China and the north central region are still below the poverty line, indicating that the income differences between regions and socio-economic classes are expanding rapidly. A comparison of the average household incomes of top 10% and the bottom 10% showed that the gap was around 10.6 times in 1996, 12 times in 1999, 12.5 times in 2001 and 13.5 times in 2004. In terms of regions, the income gap between the top 10% and the bottom 10% is as much as 14.4 times in the southeast. This is due to the growing numbers of poor in the cities as a result of the population drift from rural communities into the cities, and the failure of incomes to grow among ethnic minorities. The Gini coefficient, which illustrates income distribution inequality, etc., was 0.413 in 2004.

Yuji Miura

Source: The Japan Research Institute. Limited